The savior for stock market beginners has arrived! A guide to help you choose the right ETF.

Are you still losing sleep over stock selection? Are you still glued to monitoring a single stock all day long? Are you still anxiously worrying about market fluctuations, unable to find peace of mind?

Don’t worry, ETFs are here to rescue you! Today, Joe is here to talk about how beginners can choose the right ETFs.

Why are ETFs a lifesaver for beginners?

Let’s start with the advantages of ETFs themselves:

1. Diversification: ETFs typically track different indices, industries, or asset categories, offering natural diversification. This means investors can reduce the risk of individual stocks by purchasing a basket of stocks.
2. Trading flexibility: ETFs can be freely bought and sold on the secondary market like stocks, with real-time price changes, allowing investors to quickly adjust their investment portfolios based on market conditions.
3. Low cost: Passive ETFs have lower trading costs because they do not require frequent adjustments like active ETFs, saving on management fees as they do not require fund managers’ intervention.
4. Low threshold: The price per share of most ETFs ranges from 0.5 to 5 yuan, making it beginner-friendly for those with limited funds to start investing with just a few hundred yuan.
5. Easy to understand and operate: ETFs combine the advantages and features of stocks, open-end index funds, and closed-end funds, making them an efficient index investment tool. They are suitable for both regular investment and lump-sum investment, making them ideal for novice investors.
6. Significant long-term returns: Many experts and successful investors recommend ETFs as a long-term investment tool because they can provide stable returns and are relatively easy to manage.

Joe was initially obsessed with finding specific stocks that could increase by 10 times, only focusing on a few stocks every day. Then I started to think, there are too many uncertainties for me to do it this way…

I want to start by learning about a company, but there are many key indicators that I am not very familiar with, so my own costs are quite high. Don’t put all your eggs in one basket! It’s important to diversify investments!

Speaking of this, I’m sure you and Joe have also thought of the same question, is there a way to put several companies we are interested in together?

ETF, these three letters seem to be an investment tool tailored for beginners! It not only allows you to easily achieve diversification in investments, but also saves you the trouble of selecting individual stocks one by one. Just imagine, by buying one ETF, you effectively own a basket of stocks, isn’t that cool!?

Beginner’s Guide to Choosing ETFs

There are plenty of ETFs on the market, so choosing one is not that simple. The key is to find one that suits you. So, how can beginners choose the right ETF for themselves?

• Clarify investment goals: Joe will first ask you, do you want to make money steadily or are you willing to take risks for high returns? This step is crucial. It determines what type of ETF you should choose.

• Research tracking indices: Each ETF tracks its own index. Understanding the characteristics of these indices is as important as understanding your investment partner.

• Focus on costs: Low costs are an advantage of ETFs. Choosing ETFs with lower fees can maximize your benefits.

• Understand holdings: Take a look at what “treasures” are in the ETF to ensure they align with your investment philosophy.

The performance of ETF tracking an index can be measured by multiple key indicators, mainly including the following two:

Tracking deviation refers to the deviation between the return of an ETF and the return of the underlying index. Daily tracking deviation equals the difference between the daily net asset value growth rate of the ETF and the daily return of the underlying index. This indicator reflects the performance variation of the ETF relative to its underlying index in the short term.

Tracking error is an important indicator to measure the performance of an ETF tracking the underlying index, reflecting the degree of fit between the fund and the underlying index. Tracking error equals the standard deviation of the tracking deviation during the observation period. If the tracking error is small, it indicates that the ETF closely tracks the underlying index in both the long term and short term; conversely, if the tracking error is large, it means that the performance of the ETF deviates significantly from the underlying index.

In addition, although not the main measuring indicators, there are other factors that can also affect the performance of an ETF:

• Liquidity: The liquidity of an ETF also affects the trading convenience and costs for investors. Although larger ETFs usually have better liquidity, it does not mean that all large-scale ETFs have the best liquidity.

• Fees: The management fees and other related expenses of an ETF are also factors to consider when choosing an ETF, as these costs directly impact the final investment return.

How to choose the appropriate ETF fee rate based on individual risk preferences?

• Understanding one’s risk preferences: Firstly, investors need to clarify their risk tolerance. Generally, ETF funds are divided into five categories based on the underlying assets: equity, cross-border, gold, bond, and currency. Different types of ETFs have different risk levels and return characteristics. For example, equity ETFs and cross-border ETFs carry higher risks, while bond and currency ETFs have relatively lower risks.

• Selecting the suitable ETF type: Based on one’s risk preferences, choose the corresponding type of ETF. Investors with a high risk preference can opt for commodity ETFs or ETFs related to the US stock market (such as Nasdaq ETFs, S&P 500 ETFs); investors with a medium risk preference can choose A-share market thematic ETFs, sector ETFs, or broad-based index ETFs; investors with a low risk preference can select bond ETFs or currency ETFs.

• Evaluating the fee rate: After selecting the appropriate type of ETF, the next step is to pay attention to the fee rate of the ETF. Generally, ETF management fees are relatively low, compared to the 1.5% of actively managed funds and 1% of structured index funds, making ETF costs more affordable. Therefore, when choosing an ETF, it is advisable to select funds with lower fees to reduce expenses in long-term investments.

• Considering other factors comprehensively: In addition to fees, other factors such as fund performance history, liquidity, tracking error, etc., need to be taken into account. These factors will all affect the final investment outcome and returns.

Do you know how to build an ETF investment portfolio?

You can start with a balanced investment portfolio recipe:

60% Core ETF + 20% Dividend ETF + 20% Growth ETF

This recipe is like a delicious investment feast: the Core ETF is the main course, providing you with stable energy; the Dividend ETF is the vegetables, offering essential nutrients; the Growth ETF is the tasty dessert, bringing more surprises to your taste buds!

Don’t know where to start? Here are a few ETF types suitable for beginners recommended by Joe:

Broad Market Index ETF: such as SPY (tracking the S&P 500 Index), allowing you to grasp the overall picture of the U.S. stock market at a glance.

Technology Sector ETF: such as QQQ (tracking the Nasdaq 100 Index), putting you on the fast track of technological innovation.

Dividend ETF: suitable for investors who prefer steady returns.

Bond ETF: adding stability to your investment portfolio.

However, investing in ETFs, while simple, also requires doing your homework to understand the characteristics and risks of ETFs in order to truly harness this investment tool!

Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investing involves risks, so caution is advised when entering the market.